Falling Oil Prices and Missed Investment Opportunities

Unless you’ve been living under a rock for a few weeks, you should know that the oil price has taken a pasting.

As Bloomberg notes:

Oil’s decline is proving to be the worst since the collapse of the financial system in 2008 and threatening to have the same global impact of falling prices three decades ago that led to the Mexican debt crisis and the end of the Soviet Union.

The iron ore price collapse has gotten a lot of headlines this year.

But in terms of global economic impact, nothing beats a good oil crisis.

An iron ore price collapse may hurt the iron ore producers, and even the economies that export the iron ore.

A gold price collapse may have the sound money enthusiasts up in arms, and cause some problems for gold producers.

But only an oil price collapse can bring entire economies to the brink of disaster…and provide so much joy for consumers.

The Bloomberg article explains:

Russia, the world’s largest producer, can no longer rely on the same oil revenues to rescue an economy suffering from European and U.S. sanctions. Iran, also reeling from similar sanctions, will need to reduce subsidies that have partly insulated its growing population. Nigeria, fighting an Islamic insurgency, and Venezuela, crippled by failing political and economic policies, also rank among the biggest losers from the decision by the Organization of Petroleum Exporting Countries last week to let the force of the market determine what some experts say will be the first free-fall in decades.

Now some economists are talking about the prospects of the oil price falling to US$40 per barrel. It hardly seems possible, and yet, when markets move it doesn’t take them long to move into a trend.

For the past three weeks, Quant Trader Jason McIntosh has been teaching traders the importance of identifying and then following trends.

If you haven’t checked out his work yet, be sure to do so here.

However, remember that the crashing oil price is only half the story. If you short-sold oil futures contracts before the crash, you would have done well.

If you had short-sold the United States Oil Fund ETF [NYSEARCA:USO], you should have done pretty well too.

Source: Google Finance
Click to enlarge

But that’s not the only opportunity.

After years of pain, long suffering shareholders in one Aussie stock finally have a reason to cheer…

Once hated…and still hated?

I’m of course talking about an industry that hates high oil prices — the airline industry.

And in particular I’m talking about the Qantas Airways Ltd [ASX:QAN] share price.

Since the oil price started to weaken in October, the Qantas share price has moved up nicely.

Source: CMC Markets Stockbroking
Click to enlarge

And it’s not just the big Aussie airliner thanking their lucky stars about the falling oil price.

US airline stocks United Continental Holdings [NYSE:UAL] and Delta Airlines [NYSE:DAL] gained 9.8% and 5.3% respectively in US trading on Friday.

American Airlines [NYSE:AAL] is up 10.4%.

Who said that airlines are a terrible business?

Yes, there is that old saying that collectively airlines have never delivered a profit. I don’t know if that’s true or not. But even if it is, that shouldn’t be a reason to avoid an entire sector.

Instead, it’s an even better reason to be a stock picker rather than a ‘collectivist’ and passive managed fund investor.

However, there is one thing to get off my chest. To be honest, I’ve failed you over the past few weeks. Even though everything that’s happening in the oil market has played out exactly as I said it would, I may as well not have told you about it at all.

This can be a problem when you focus too much on macroeconomic events, and not enough on stock specifics.

Taking a punt on the airlines should have been a no-brainer trade. Unfortunately, I missed it. So, should you make up for it and buy into the sector now?

It wouldn’t be my trade, not today.

And yet, it’s something that a lot of traders and investors do. They realise that in hindsight an investment idea was a no-brainer. But rather than licking their wounds and moving on to the next idea, they become frustrated at missing and opportunity, and so try to ‘chase’ the stock.

Now, there’s something to be said for buying into trending stocks. That’s how the Quant Trader system works. However, a rising price over two or three days doesn’t necessarily make for a trend.

Quant Trader has a number of indicators that go into the mix in order to generate trading signals. A couple of those include the use of moving average crossovers, and waiting for a stock to have a go at a multi-day high.

You can find all the details here.

The bottom line is that there are around 2,000 stocks on the ASX. If you miss one opportunity, it usually isn’t long before another opportunity surfaces.

So having missed the opportunity, I wouldn’t rush in to buy the airlines for a ‘cheap oil’ trade today. I wouldn’t be surprised if some of the heat came out of these stocks in the next few days, especially if last night’s rebound in oil continues.

Anyway, the recent oil price action and the price performance of the airlines is another reminder — it’s important to understand and recognise the importance of macroeconomic events…

But it’s even more important to find the stocks that can benefit from these events. Without that actionable advice, the rest is simply academic and not particularly useful to you.

Lesson for the day: Must work harder.

Kris Sayce
Publisher, Markets and Money

Editor’s Note: This article was adapted from Kris’ commentary in Port Phillip Insider earlier this week. All figures have been updated to reflect current prices.

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Kris Sayce
Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Markets and Money e-newsletter in 2005. He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.

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